Informality, Product of Irksome Formality

Ethiopia, akin to its developing counterparts, has a broad and lively underground economy. It does not contribute to the national coffer or gets regulated by the government. It is instead dictated by the rawest of market forces. It is the perfect example of the fact that supply will always thrive if there is adequate demand, even if the government gets annoyed by it.

It was only last week that the Ethiopian Revenues & Customs Authority (ERCA) announced that contraband goods of close to 60 million Br were seized last month. Most of these were in the process of being brought into the country – betraying that even the underground external trade is geared heavily towards imports.

There was good news. It is less than – 12 million Br less to be specific – that of the same period last year. This is a welcome development. There is less need for illicit outflow of goods and financial resources, even less of the informal market. It will mean more domestic revenues and less external debt. It will mean additional resources that could be diverted into other avenues, such as the health or education sectors.

Ethiopia’s informal sector is over a third of the nation’s gross domestic product (GDP). It is a loss to the country that such a giant part of the economy is unregulated, and is not taxed. The same can be said for illicit financial flows, which is estimated to cost Africa a 100 million dollars annually, more than the GDP of most African states.

“And we know that this is a very conservative estimate,” was Vera Songwe’s, executive secretary of Economic Commission for Africa (ECA), take of the above statistics at a conference at her institution’s headquarters.

Indeed it seems it must be. Everyone has a tale to tell of clothes and electric equipment bought at cheaper prices through such mechanisms. It is usually for the sake that they are more convenient to turn to. Most of these goods are not only affordable but even at times prove to have better quality.

Of all the laws that are harder to enforce, it is the ones that are not ethically wrong per se. It is not right to kill – a priest and my entire family and friends can warn me of this. It is not right to buy a t-shirt without paying a value-added tax (VAT) on it – this is not a piece of advice one finds elsewhere but from authorities.

It is concurrently impossible to claim that the government wants the informal sector to disappear. I have never seen a street vendor selling a sweater at 250 Br a piece, often around Megenagna, find himself in hot water with law enforcement officers.

It is always a game of cat and mouse, with the vendors returning to their original spot the second the long arm of the law is out of sight. There is no difference with youth that exchange hard currency on the black market, mostly around Ethiopia Hotel, oftentimes announcing their intentions to every passerby.

Perhaps, it is because the government does not want to blow the businesses in the informal sector out of existence. That would contribute negatively to the economy, especially where jobs are concerned. Almost 32pc of the workforce in Ethiopia belongs to the informal sector. It is apparently providing a means of employment for individuals that would otherwise compete in the formal sector, exasperating the shortage of jobs in the nation.

Instead of the longstanding cat and mouse game, what the authorities need to concentrate on is attracting the informal sector: something the authorities are trying to work on to a certain extent.

There is an initiative by the Addis Abeba City Administration geared in this regard to formalise the sector. It would allow street vendors to sell their goods in areas designated for them. The vendors would not be taxed right away.

In fact, despite a registration fee, they pay no expenses for being allowed to sell in these areas. The short-term benefits will be understanding the size of the market – which is not always a bad thing – and keeping a tab on the types of goods they sell.

But that alone would not create the type of smooth transition the government requires. The reason for a buoyant underground economy is the lack of an attractive formal business environment. In a nation where one has to renew a business every year, where it is not possible to pay taxes online, and most firms are cash-strapped, the informal sector promises more convenience and less cost.

The informal sector promises a better business environment, and as long as this is the case, the government is on the losing side. Improving the doing business environment in Ethiopia will not only help businesses thrive, and start-ups proliferate, but attract the informal sector into the woefully slim tax bracket. The alternative, or the status quo, will result in worsening the runt the country is in now.


By Christian Tesfaye
Christian Tesfaye ( is Fortune's Op-Ed Editor whose interests run amok in both directions of print and audiovisual storytelling.

Published on Jan 21,2018 [ Vol 18 ,No 926]



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